A car loan is among the biggest financial responsibilities that a person can commit to. With the monthly payments getting larger, terms getting longer, and APRs increasing, the debt from a new or used car can become an unbearable burden.
If you are not sure how to pay off a car loan faster, then you need to know that it is much easier than you might think. There are various ways one can consider to pay off their car loan faster and get rid of the large expense of their car payment in the monthly budget.
Can you pay off a car loan earlier?
While most people have to take out a loan to pay for a new or used car, it is important to know that a car payment can be considered too high if it requires you to spend more than 30% of your total income. You need to remember, too, that a car payment is not the only vehicle expense that one needs to consider. There are also other expenses such as paying for fuel and maintenance. Always try to limit your car payment to less than 15-20% of your earnings.
After you figure out the amount you can afford to pay on your car payment, you should determine the current balance of your loan and confirm whether it is possible to pay off your car loan earlier without any penalties. While most loans now allow early payoffs, some impose extra penalties, which can even cost you more money in the long term. Make sure to pay extra attention to the penalties if you have bad credit or a high-interest rate.
What happens when you pay off a car loan early?
If your car loan allows for early payment, you should use that opportunity to save money on interest and improve your credit score. Depending on the interest rate of your car loan, the longer the loan’s terms are , the more interest you will pay . So, if you pay off your loan before the term ends, you can save a lot of money by not paying as much interest.
However, you may decide that you want to spend that money on other purchases instead of paying off your loan’s interest. If you are not sure how much money you can save on interest, speak with your lender, or use an auto loan calculator to figure it out .
If you choose to pay off the balance of your car loan, remember to keep the account open for the loan’s complete term to show investors that you made your payments on time. This can really boost your credit score.
Paying off a car loan early
Now, let’s dig in to find out how you can actually pay off your car loan early. Here are some strategies you can follow to get rid of debt fast –
● Refinance
If your current auto loan comes with high interest rates and other monthly fees, you may be able to refinance your loan with one that offers better terms with lower payment options. You can qualify for better loan terms if your credit score has improved since you applied for the original loan. This is quite likely if you have been making full payments and making them on time.
If you are not qualified for a lower monthly payment or a shorter payoff period, refinancing may not be a suitable option for you. Your goal needs to be to pay off the car loan quickly, so you don’t want to just lower your monthly payments but lengthen your term. That would actually mean you would be paying more for your car by paying more interest in the long run.
● Avoid skipping payments
Auto loan payments can be costly, which makes it extremely tempting to skip a payment or two if your lender gives you permission to do so. However, if you are skipping payments, that can only take you farther away from your goal of paying off your car loan. Skipping payments can lengthen the term of your loan, and as a result, you end up paying more interest.
● Reduce Expenses
If you want to lower the bills you already have, think about how you can reduce the extra expenses in your life. Are you unsure how to quickly pay off your car loan? You can think about things you could do without for some time that are costly, but not actually necessary. Think about cutting down your dining out, entertainment, or shopping budget for some period of time to save some extra cash to pay off your car loan.
Conclusion
Today, there are many ideas that one can use to pay off their car loan as quickly as possible. Among them is the Paydown Rewards Debit Mastercard, which you can use to get the benefits of maximum savings that allow you to save around 15% over cash. Another is the Paydownhero app that allows you to enjoy roundups from your daily transactions which auto-pay on your car loan when you spend money.
